Borrowers suffer disclosure overload
Part 1: Poking holes in mortgage reform
By Jack Guttentag, Monday, May 25, 2009.Editor's note: This is Part 1 of a two-part series. Read Part 2.
Reading proposed legislation designed to "reform" the mortgage market is usually a depressing experience for me. Most of the proposals would take us further away from, rather than closer to, a competitive system that works for borrowers. This is certainly true of HR 1728, called the Mortgage Reform and Anti-Predatory Lending Act, which was winding its way through Congress when this was written.
Virtually every section of HR 1728 bears the fingerprints of consumer groups and/or mortgage lenders. Legislators and their staffs operate under the illusion that by adjudicating between these groups, they can achieve a balance between the interests of borrowers and those of lenders. This is an illusion because most of the policies espoused by consumer groups further the interests of consumer groups, not those of consumers. Consumer groups look to entangle lenders in a maze of complex rules and potential liabilities, which provide opportunities to counsel and litigate for borrowers, and make special deals with selected lenders.
The tragedy is that neither lenders nor consumer groups want to make the market work more effectively, because a well-functioning competitive market would both force down prices and reduce the need for consumer groups.
The mortgage market works poorly because borrowers know so little relative to the loan originators they deal with. Economists call this the problem of information asymmetry. There are two major tools for overcoming information asymmetry: mandatory disclosures, which are discussed below; and transaction simplification rules, which are discussed next week.
Under mandatory disclosures, government mandates by law that lenders must disclose what borrowers need to know to negotiate on an equal basis. We have had mandatory disclosures for three decades, however, and it has not helped borrowers in the slightest. Mandatory disclosure has raised lender costs, lengthened transaction periods, but for the most part has left borrowers as confused and overwhelmed as before. Indeed, judging from the many hundreds of letters I have answered on the subject, the required disclosures in many cases have created more, rather than less, confusion.
The reasons are well known to everybody familiar with the process, including many of the consumer groups. The total volume of disclosures is excessive, overwhelming borrowers; a large proportion of disclosed items is garbage of no value to borrowers; some disclosed items are irreconcilable with others because they originate with different agencies; and none are abreast of the current market. ...CONTINUED
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Submitted by Bruce Hahn on May 25, 2009 - 4:25am.
American Homeowners Grassroots Alliance
In an ideal world, disclosures would not be necessary because lenders would apply sound underwriting practices that would prevent mortgage loans to those financially unqualified or dishonest, and our educational system would assure that most of the balance were able to understand the implications of the mortgages they were applying for. Unfortunately the housing crisis we now face was caused in a large part by mortgage lenders’ abandonment of sound underwriting practices.
Consumer groups want the market to work more effectively, but from a practical standpoint there will always be unsophisticated borrowers, and it is impossible to pass a law mandating that lenders never deviate from sound underwriting principles, as much as their stockholders, consumer groups, and regulators would appreciate it.
Disclosure remains the only remaining option. While disclosure is an imperfect solution, there is no data that suggests that it has not helped borrowers in the slightest or has left borrowers as confused and overwhelmed as before. Lenders always claim that any regulatory requirement they dislike will cause costs to increase. We believe that many regulations don't increase costs, and others are necessary despite the costs in order to stop practices that are hurting consumers.
Bruce Hahn
President
American Homeowners Grassroots Alliance
Submitted by Bruno Skopinich on May 25, 2009 - 10:39am.
Jack is making a very good point!
I would like to add, what I consider a stupid disclosure... APR, why? Because 90% of consumers DO NOT Understand it. They always assume that is the Rate they will get.
Lets make it stupid simple...
Disclose the interest rate, the out of pocket closing costs, and the terms of the loan... that's it!
Consumers understand those numbers.
Now let them go shopping and compare.
Make sure they understand those features are only valid if they lock in the rate and get it in writing.
What else???
Write everything in an 8th grade reading level.
One more thing...
Lets help the consumer groups get "Real Jobs"
that are productive to our free enterprise system... or face a firing squad :)
Submitted by Harrison K. Long on May 25, 2009 - 12:55pm.
Thanks for this good article about that U.S. Congress should get out of mandatory disclosure operations and business. Agree with you and that responsibility for mortgage disclosures should be with one federal agency, probably HUD, which should have sole authority to set and enforuce the rules.
I am also concerned about HR 1728. Our real estate industry and consumers do not need a new set of mandatory disclosures, and lenders should not be required to disclose "the comparative costs and benefits of each residential mortgage loan product offered, discussed or referred to by the originator."
Harrison K. Long
Realtor & broker, Explore Properties Group
Coldwell Banker Previews, Irvine, CA
949-854-7747
949-701-2515 cell
www.ExploreOCHomes.com
http://twitter.com/hklong
http://activerain.com/blogs/hklong
Submitted by Keith Labrecque on June 1, 2009 - 7:18am.
Great points and timely article, Jack!
Bruce, unsound underwriting practices are only PART of the issue. I am surprised you said what you did.
In "an ideal world" a LOT of things would not be necessary, but disclosure of certain loan elements in a consistent manner (loan-to-loan and provider-to-provider) would still be a good thing and would be done "in an ideal world" whether "required" or not. Of course, in "an ideal world" everyone would have scruples and ethics, and follow them!
I myself have faced numerous lenders who failed to disclose that the "best product I qualified for" is in fact best for their own paycheck, and not best for me! That is, they FAILED to mention other lower-interest and/or lower closing cost loans I was qualified for which I would have preferred. Thus, the benefit of disclosing "the comparative costs and benefits of each residential mortgage loan product offered, discussed or referred to by the originator" is weak at best.
Furthermore, at every closing I have been surprised by "junk fees" added that were not in the Good Faith Estimate, like Document Preparation fees, or Courier Fees, or other random made-up names for "extra profit". I have successfully refused to pay these, and without the requirement of the Good Faith Estimate provisions for disclosure, I'd have been most likely stuck against a closing deadline without a backup plan.
And prior to the Truth In Lending laws, the disclosures were made but were confusing, misleading or even false, and totally unhelpful to the consumer. At least those disclosure requirements have brought SOME uniformity to the matter.
And Bruno, to your "that's it" list of required disclosures I am glad you added the eighth-grade reading level - but it must be comprehensible to an eighth grader and not just readable, yes?
Keith Labrecque
Two Maples Properties LLC
www.twomaples.com